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Crude-oil prices have surged 42% since early October, and Asia may be more susceptible than other parts of the world to pricier oil. With its aggressive industrialization and unabashed economic expansion, Asia produces only enough oil to meet a third of its needs. Net crude-oil imports for the continent (excluding Japan) swelled from US$234 billion in 2009 to a record US$447 billion last year, and each $10 per-barrel rise in oil prices adds about $3.5 billion to Asia's monthly oil import bill.

How will higher costs affect Asian markets? With Brent crude up 17% this year, to about $126 a barrel, Nomura's Hong Kong-based economist Rob Subbaraman outlines three possible scenarios he deems good, bad and ugly. The first—and the one he thinks most likely—is for Brent crude to average $120 a barrel in the first quarter, before speculative fervor and geopolitical concerns subside enough to send prices lower, to an average $110 for 2012. In that case, Asia ex-Japan could eke out economic growth of 6.6%.

Things get merely bad if Brent crude averages near $125 for the entire year, which could slow growth of gross domestic product to 6.4%. But under the ugly scenario, speculators and worries about supply disruptions send oil spiking toward $150 by the second quarter and eventually produce a 2012 average near $135. Growth would slow to 6.1%, while core inflation jumps from 4.5% to 5.2% or more, which would further limit Asian central banks' license to cut interest rates and resuscitate their economies.

Of course, it matters whether oil prices are being driven higher by swelling demand or thwarted supply. After all, an enthusiastic appetite for oil and commodities generally bodes well for Asian economies and is a sign the planet's investors are more willing to embrace risk—and Asian stocks. Asian stocks tend to do well in the early part of a crude-oil rally. As oil ran up over the past five months, Asian stocks have rebounded 24% as foreign buyers flocked to the continent.

Alas, there isn't compelling evidence pointing to surging global appetite. Aside from geopolitical tension in the Middle East, oil's latest rally seemed to be spurred as much by the gush of easy money looking for a destination, or at least a momentary parking spot. According to the International Energy Agency, excess demand shrank in the fourth quarter, and global oil demand is expected to wane over the next two quarters as growth slows, Subbaraman notes.

If oil keeps climbing, at what point does it start to hurt Asian stocks? India, for example, tends to rally with oil prices and increasing risk appetite until a certain threshold is breached—when higher energy bills start to eat into consumers' wallets and companies' profits. In previous oil rallies, that threshold had been about $90 for Brent crude, but India's strengthening economy and increasing ability to withstand rising energy costs have nudged this "line of indifference" to about $110, says Aditya Narain, Citigroup's head of India research.

Early in an oil rally, sectors like metals, banks, capital goods and small stocks tend to shine. But past the point of indifference, more-defensive sectors like health care, consumer staples, technology and, of course, energy start to hold up better. That's why Indian stocks like
Tata Motors
(TTMT.India),
Steel Authority of India
(SAIL.India) and
Infrastructure Development Finance
(IDFC.India) have tended to thrive as oil begins surging. But once past the threshold of indifference, companies like
ITC
(ITC.India), a diversified consumer-products conglomerate, and
Dr. Reddy's
(DRRD.India), a pharmaceutical company, have tended to outperform.

A steadfast oil rally will, of course, favor oil-exporting nations. Economies with spare capacity also should hold up better since the higher oil prices are less likely to trigger runaway inflation or prod central banks to immediately constrict monetary policy. While markets in Norway, Russia and Canada should prosper if oil keeps running up, Asian markets like Thailand, Korea, India and Hong Kong will come under mounting pressure.

ALMOST A YEAR AFTER THE earthquake and tsunami devastated Japan, the Nikkei last week pushed briefly above 10,000, the first time since Aug. 1, before closing Friday at 9930. Exporters led this eighth gain in nine weeks, as the yen weakened and core inflation in China skidded from 4.5% in January to 3.2% in February, spurring hopes of looser monetary policy. In the disaster's early aftermath, with the Nikkei wilting below 9000, my colleague Leslie Norton urged investors to consider Japanese stocks, which were trading at 13.9 times annual profits, the cheapest level since the financial crisis (see "Invest in Japan ," March 21, 2011). Japanese stocks struggled initially amid fears of a global recession, but have swiftly rebounded by 22% since late November.

Still Rising

Japanese stocks rallied for a fifth straight week, hitting a 2012 high.